A la Carte Cable Should Not be on the Government’s Regulatory Menu

Both the FCC and members of Congress have been erroneously looking to an “a la carte” cable pricing mandate for the industry as a solution to rising cable prices, lack of consumer choice, and the need for improved parental control. In addition, regulatory bodies are wanting to use a la carte as a “carrot and stick” to carriers wanting to enter the cable market.

Why are they looking at a la Carte?

Over the past decade, cable prices have risen much faster than the rate of inflation. To combat this, the government is focusing on a theory that an a la carte cable pricing option would lower monthly bills by allow consumers to pick and choose the cable TV channels that they desire and then pay on a per channel basis. Data reflects that most households watch on average about 17 TV channels regularly (11 cable and 6 local broadcast) even though there are approximately 100 channels available to them. The main but potentially flawed premise is that the amount paid for the 17 channels via a la carte would be lower than the price for the existing bundled offering.

Also, given the fact that the average household regularly watches only 17% of the TV channels offered to them, a la carte would give the consumer more choice in selecting the channels they desire. More so, parents could utilize a la carte to create a line-up that is more family oriented and safer for children to watch.

Why is a la Carte wrong?

Higher per channel price – While an a la carte cable offering may or may not lower a household’s cable bill, it will certainly raise the current price per channel that a consumer pays. More times than not, when a consumer buys in bulk or bundles services, they receive a lower per unit price than if they were to purchase them individually. Furthermore, it could be expected that a la carte would increase the marketing expenses of program networks since they would have to more actively advertise in order to have consumers select their channels. Licensing fees would also possibly increase in order to offset certain revenue losses, which would then in turn increase the channel price.

Less programming choices – A direct result from these increases in expenses and lost revenue would be the eventual failure of certain program networks, primarily the smaller networks that serve niche interests due to the limited/marginal demand associated with them (revenue from the limited demand would not be high enough to cover expenses). This would clearly reduce the choices in programming offered to consumers. For example, how many people would pay for CSPAN, Lifetime, DIY network, the Golf Channel, etc. individually? In addition, a la carte may prohibit the opportunity for new programming to be created because demand would have to be developed immediately and in many cases “sight unseen.”

Ineffective parental control – Finally, there has been the discussion that a la carte cable will improve parental control. It will allow families to create line-ups that are more favorable to family viewing. Well, maybe not. A recent report by the Parents Television Council analyzed 443.5 hours of children’s programming from ABC, Fox, NBC, WB, ABC Family, Cartoon Network, Disney Channel and Nickelodeon and found that there were 3488 instances of violence, which is an average of 8 violent incidents per hour. So there are many shows on family-related channels and even news programs that are inappropriate for children to watch.

Furthermore, there is already a mechanism in place to provide such control; the V-chip. However, a 2004 Kaiser Family Foundation report cited that only 15% of all parents utilize it. Also, cable operators have been proactive in providing customers controls to block programming/channels and even hide titles from being viewed on the screen. So parents need to be better educated about what means exist to effectively regulate family viewing.

How did a la Carte come about?

The FCC’s “Further Report” on a la carte cable (released in February ’06), which is what both members of Congress and the Commission itself are using to validate their pursuing of this potential directive, was based on a Booz Allen Hamilton report (for the NCTA) released in July 2004. The FCC modified, for a second time, certain assumptions and variables of the Booz Allen report and then detailed the results derived from those changes.

Many of the conclusions from the Further Report conflicted with not only the Booz Allen Report but the FCC’s first assessment, the “Initial Report,” which was published in November ’04. Booz Allen’s report noted that there was significant “uncertainty” in developing an economic model for a la carte cable. There was also a noteworthy lack of empirical data for the report, so the firm had to change the methodology it utilized.

Inconclusive Reports?

But the FCC’s Initial Report concluded that consumers would see their monthly bill increase between 14% and 30%. Subsequently, the Further Report revised those figures to a price change ranging from a 13% decrease to a 4% increase. For the record, the initial Booz Allen report predicted that consumers would see their bill increase 7% to 15%.

How does this translate into actual dollars? Kagan Research estimates, for 2006, the average monthly price for expanded basic programming is $41.17. A 13% decrease would result in a savings of approx. $5.35, bringing the monthly bill to $35.82. On the other end, a 30% increase would mean $13.35 more a month, resulting in a $53.52 bill. That is an extreme – the median would be around a $6 increase, meaning a $47 monthly charge.

These figures are all over the board! It is clear as day, given the significant uncertainties with the reports themselves and a la carte’s possible wide-ranging affect on cable prices that the risks are too great for Congress or the FCC to gamble by enacting regulation; two out of three reports establish that.

What is the Solution?

If a la carte is not the right path to pursue, what is? Well, it is a very simple answer… competition. Congress and the FCC should not look to further regulate a sector but must promote healthy competition in it. Time and time again, we have seen competition to bring lower prices, more innovation, and more choice to the consumer.

Competition and innovation such as digital TV, Video on Demand, Internet video, and podcasting will also bring new business models that may make it more economically feasible to better cater to consumer demand and develop additional pricing schemes. Also, if cable operators want to explore a la carte as a cable pricing option, they certainly should have that choice but it shouldn’t be ordered so by the government.

In addition to competition, as mentioned earlier, education is a critical component of the solution to address certain concerns. Parents need to be more active and responsible in regards to the viewing habits of their children and making sure that the existing methods for parental control are better utilized.

Conclusion

Congress, the FCC, and the states need to remove the archaic barriers to entry that currently exist in the cable markets so that new entrants can more quickly offer competitive products and services as an alternative to incumbent cable. Competition provides a natural market dynamic that is essential to the health of an industry and promotion of fair pricing and more choices to consumers much more so than the artificial economic influence from regulation under an “a la Carte” banner.

While a la carte cable sounds exciting and flashy, it is just the opposite. It will ultimately leave a bitter taste in the mouth of the consumer and the industry for it is not an appropriate substitute to what is really needed.